Israeli Prime Minister Benjamin Netanyahu told ABC's Charles Gibson tonight he welcomes talks -- without preconditions -- to set up a Palestinian state in the Middle East. But he said it is up to Palestinian leaders to exert leadership, and added he is not going to back down on the right of Israelis to settle in Palestinian territory.

"There are a quarter of a million people living in these communities," said Netanyahu. "You know, they need kindergartens. They need schools. ... You can't freeze life."

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In a one-on-one interview with Gibson, Netanyahu said he is especially worried about Iran -- which, he said, could destabilize the entire Middle East with the development of nuclear weapons.

"The development or acquisition by Iran of nuclear weapons is something that endangers world peace," said Netanyahu. "Iran is the major sponsor of world terrorism. Now, imagine what terrorism could be if the terrorists had a patron that gave them a nuclear umbrella, or -- worse -- if that patron actually gave them nuclear weapons. That's a nightmare scenario."

Middle East: Israel, Palestinians Still Stalled

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Negotiations for a new peace treaty between Israel and the Palestinians have long been stalled over the settlements built by Israel in Palestinian regions.

Netanyahu said he is happy to sit down and talk with Palestinian leaders. But if they insist, before the talks start, on a freeze on Israeli settlements, that is a way "to make sure that the peace process does not go forward."

Gibson asked by "not making some move in the direction of their preconditions, aren't you missing an opportunity?"

"No, Charlie, I said no preconditions on the beginning of negotiations," Netanyahu responded. But he added, "I think the Palestinians have to recognize Israel as the Jewish state and I think we need security."

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"We want a real peace. We don't want a peace where we hand over territory which becomes a base for Iran's proxy so they can fire thousands of rockets on us. We want real peace."

Israel's Netanyahu Tells Charles Gibson Iran Worries Him

Netanyahu and President Obama are in New York, along with more than 100 other world leaders for the 64th annual meeting of the United Nations General Assembly.

Earlier in the day, ABC Senior White House Correspondent Jake Tapper reported that Obama met with Netanyahu and Palestinian President Mahmoud Abbas, and that, according to a White House official, Obama "was pretty tough" on both of them, conveying "a sense of his impatience and seriousness and his analysis that they need to get going."

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"My message to these two leaders is clear," Obama said when reporters were allowed into the room at the Waldorf-Astoria, just blocks from the United Nations. "Despite all the obstacles, despite all the history, despite all the mistrust, we have to find a way forward. We have to summon the will to break the deadlock that has trapped generations of Israelis and Palestinians in an endless cycle of conflict and suffering. We cannot continue the same pattern of taking tentative steps forward and then stepping back."

'A Defensible Peace'

Netanyahu told Gibson it is up to the Palestinians to sit down with an open mind.

"Here's a government in Israel," said Netanyahu, "that unites the political spectrum. It wants peace. It wants to move ahead with peace. It wants a genuine peace, a defensible peace, one in which the Palestinians recognize Israel and Israel has the necessary security.